Chris Barton 's Opinion

Technology columnist for the NZ Herald

Chris Barton: Is the cost of broadband about to rise?

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Photo / Thinkstock
Photo / Thinkstock

There's a Machiavellian hand at work in Amy Adams plans to raise the cost of broadband for New Zealand consumers. The Minister for Communications says the price increase is necessary to encourage us to move across to the new ultra fast broadband (UFB) fibre network being rolled out around the country courtesy of $1.35 billion government investment.

Or, as she puts it: "To address significant concern about the on-going uncertainty over changes to the regulated copper wholesale price and the destabilising effect that could have on the transition to fibre."

The words worth focussing on are "on-going uncertainty" and "destabilising effect" because actually the opposite was true. Consumers were in a phase of great certainty - looking forward to a wholesale price drop for existing copper broadband of $12.53 per month. Yay! And the fibre network was rolling out just fine with users moving to it slowly - exactly as expected.

What's not to like? Thanks to our Commerce Commission, broadband in New Zealand would at last be priced fairly and reasonably - reflecting the actual cost of running the network while still making a good profit. The correction was well overdue. Consumers know they've been paying far too much for broadband because a rapacious monopoly - Telecom (now Chorus) - has been ripping us off for decades. The Commission was finally fixing the longstanding anomaly of Chorus extracting up to $12.53 per month in monopoly rents from hapless consumers. Monopoly rents worth at least $100 million a year to Chorus's bottom line, probably significantly more.

The only uncertainty Adams is talking about is Chorus's share price which took a bit of dive following the Commission's draft announcement last year. Chorus said it could lose up to $160 million in 2014 earnings if ordered to slash network charges prices by nearly 28 percent in two years' time as proposed. Analysts piled in.

Deutsche Bank predicted a share price over the next year of $2.29 (significantly lower than Chorus's listing price of $2.94) and cut its dividend forecasts for Chorus for 2015 to 18 cents per share, down from 25.5 cents previously. Deutsche also noted Chorus was facing some "$500 million of estimated unbudgeted costs associated with the greater than forecast cost of supplying UFB connections between the network and consumers' premises."

The general feeling among shareholders amounted to shock, horror - "we never saw this coming". No one entertained the idea the stock was always overpriced.

The PM further fuelled the uncertainty flame following the release of the commission's report saying: "It has significant implications both for [Chorus] and for UFB. It substantially reduces the income of that company and its capacity around broadband."

Here's what John Key might have said: "Well, thems the breaks. The Commission has arrived at its determination after careful consideration. The determination was signalled in 2010. The process has been in law since 2011 and we've been expecting it since before Chorus was formed, following the de-merger with Telecom. No one, including the analysts, should be surprised by this. If they are, then they haven't done their homework."

To which an enquiring journalist might have asked: "What about the extra cost Chorus is facing on the UFB?

Key: "Well that's a bit rich. We've given Chorus $929 million interest free for 14 and half years, making it a loan worth about $1.2 billion, to build its part of the UFB.

That's a pretty generous deal agreed by both parties on commercial terms. That's business. For Chorus to be moaning about extra costs - well that's its problem - we acted in good faith."

Journalist: "So you're not at all worried that Chorus could fail and the UFB won't get rolled out in time?"

Key: "Not at all. Look, 18c per share is still a good dividend. Chorus is still a good business with a captive market. It has until 2020 to get just 20 per cent of users onto its part of UFB and has from 2025 to 2036 to repay the loan. That seems quite doable. Meanwhile it has a guaranteed revenue stream from its existing copper network. Nothing to see here."

But of course John Key didn't say that. Instead he set in train Adam's intervention to hold copper broadband prices artificially high. Commentators were flabbergasted. TUANZ's Paul Brislen: "The only reason that the Minister has directed the ministry to come up with these prices is because Chorus's share price will be affected. That's it."

Labour's Communications and IT spokesperson Clare Curran: "Chorus continues to pull off its sleight of hand after posting a $171 million profit today while asking for $100 million a year in corporate welfare from the National Government."

InternetNZ: "Attempting to give the illusion of competition while effectively cross-subsidising fibre from copper is a recipe for disaster that will only benefit Chorus shareholders at the expense of copper customers."

The essence of Adam's argument is that wholesale copper prices should be more closely aligned with wholesale fibre prices, which have been set until 2019 on a sliding scale beginning at $37.50 and rising to $42.50 a month.

That's significantly higher than the $32.45 -$34.46 range per month for wholesale copper that the Commission is proposing to correct the rort of $44.98 a month which consumers are currently paying.

To make its argument favouring a rough equivalence in copper and fibre prices the Ministry of Business, Innovation and Employment doesn't lay out a risk-based cost benefit analysis or any facts or figures as to why the price increase is necessary. Instead the discussion document advances the spurious notion that the "modern equivalent asset" - the basis for modelling the price for access to monopoly or 'bottleneck' assets like Chorus's network - should be based on the cost to build a fibre network. Or as the document puts it: "The 'modern equivalent asset' to the copper network is a fibre network".

Which is utter nonsense - like comparing apples with oranges. A fibre network is completely different from a copper one - essentially because fibre provides a quantum leap in seemingly unlimited scalable bandwidth.

The correct model for a modern equivalent asset (MEA) to determine the wholesale cost of copper is undoubtedly a modern cabinetised network like the one Chorus has. It's also the model used by the Commission and all other jurisdictions around the world in setting access prices. It's hard to know who at the Ministry of Business, Innovation and Employment dreamed up the fibre MEA argument, but it has the cunning and duplicity of Machiavelli - making the unreasonable seem reasonable.

But it's not reasonable. Here's why:

• The fibre network won't be complete until 2020. To put up prices now while consumers wait for the new network is patently unfair.

• Having copper cheaper than fibre encourages competition and innovation - enabling consumers to enjoy the benefits of fast copper services such as VDSL which until recently have been denied most consumers here.

• The fibre network won't be available in large parts of rural New Zealand. Artificially inflating copper prices means rural customers who can't get fibre are effectively subsidising the rest of the country.

• Artificially inflating copper broadband prices is likely to have other perverse effects - such as making new mobile broadband technologies such as 4G LTE more viable, thereby also discouraging users from moving to fibre.

• New Zealand risks violating its commitments under the World Trade Organisation's (WTO) General Agreement on Trade in Services (GATS), which requires an independent regulator for all telecommunications services and measures to prevent telcos from "engaging in anti-competitive cross-subsidisation" - which is exactly what Adams is proposing.

• Fibre isn't for everyone right now, but it will be eventually as new services requiring more and more bandwidth inevitably become available. Consumers shouldn't be penalised by paying artificially inflated costs while they wait for that to happen.

But more than anything the reason why Adams's proposal is unjustified is that it doesn't lay out any empirical evidence as to why it's necessary. None. Except that Chorus's share price has dropped.

Chris Barton

Technology columnist for the NZ Herald

Chris Barton is a freelance writer with 28 years experience in newspapers and magazines. He's been writing about technology since 1986, was the founding editor of New Zealand PC World and has won numerous media awards, including, in 2009, journalism's top prize, the Wolfson Press Fellowship to Cambridge. He has a Master of Architecture, teaches part time at the Auckland School of Architecture and is an architecture critic, winning, in 2014, the Canon Media Awards Reviewer of the Year.

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